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Transforming the Compliance Function in Banks: Three Key Principles
Banks are under increasing pressure to transform their compliance functions to effectively manage risk and stay ahead of regulatory requirements. To achieve this, three key principles must be adopted:
1. Deeper Understanding of Business Processes
A more comprehensive understanding of business processes is essential for effective compliance management. This involves:
- Developing a shared taxonomy: Creating a standardized language and framework to ensure consistency in compliance practices.
- Integrating compliance into operational risk management: Aligning compliance with operational risk management to identify and mitigate potential risks.
- Ensuring alignment with business objectives: Embedding compliance within the bank’s overall strategy to support business growth and success.
2. Measuring Progress - Outcomes that Matter
To assess the effectiveness of compliance transformation efforts, a ten-point scorecard can be used. This includes:
- Demonstrated focus on the role of compliance: Ensuring compliance is seen as a critical function within the bank.
- Clear tone from the top: Leadership support and commitment to compliance practices.
- Risk ownership and independent challenge by compliance: Compliance having a clear role in identifying and challenging risks.
- Adequate talent and capabilities: Ensuring compliance has the necessary skills and resources to perform its duties effectively.
3. Integration with Operational Risk Management
Compliance must be integrated into operational risk management to ensure effective risk identification, assessment, and mitigation. This involves:
- Developing a single integrated inventory of operational and compliance risks: Identifying and tracking both operational and compliance risks.
- Coordinating risk assessment and remediation methodologies: Ensuring consistent approaches to assessing and addressing risks.
- Defining clear roles and responsibilities between risk and control functions: Clarifying the relationships between different risk management teams.
- Establishing governance processes and structures that span across risk and support functions: Ensuring effective oversight and coordination.
Organizational Structure Changes
The placement of the compliance function within banks is also evolving. Considerations include:
- Migration of compliance to a risk organization: Integrating compliance into the risk management team.
- Elevating compliance to a stand-alone function: Creating a separate department for compliance.
- Positioning compliance similar to internal audit: Aligning compliance with internal audit functions.
By adopting these three key principles and exploring organizational structure changes, banks can effectively transform their compliance functions to manage risk and drive business success.